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China Rebuff Leaves Hong Kong Bourse Isolated in Bid for LSE

Andrew Davis and Alfred Liu
China Rebuff Leaves Hong Kong Bourse Isolated in Bid for LSE

(Bloomberg) -- The Hong Kong bourse’s unsolicited takeover bid for the London Stock Exchange Group Plc suffered a further setback after China praised the British firm’s scathing rebuff.

The official People’s Daily wrote Saturday that there are “persistent worries” about Hong Kong given the current unrest, and lauded the LSE for citing its existing tie-up with the Shanghai Stock Exchange as its preferred way to access China. With almost half the pursuing bourse’s board nominated by Hong Kong’s Beijing-backed chief executive, the slapdown from the mouthpiece of the Communist party signals growing resistance to the bid.

“The LSE rejection alone would probably have derailed HKEX’s ambitions, but the People’s Daily article surely represents the end of any acquisition hopes,” said Brock Silvers, managing director at Kaiyuan Capital.

The People’s Daily piled on following LSE Chairman Don Robert’s strong rejection of the bid, issuing on Friday a laundry list of geopolitical and business reasons why the LSE finds the $36.8 billion proposal wanting. The offer had problems with “strategy, deliverability, form of consideration and value,” he said. The People’s Daily also took a swipe at the popular resistance to China’s increasing control over the city.

“Some people in Hong Kong still have a negative view toward integrating into the development of the nation, as they don’t see what opportunities it brings to Hong Kong,” according to the commentary. “This doesn’t only show how short-sighted it is from an economic perspective, but also how narrow-minded from a political perspective.”

A spokesman for HKEX on Saturday said the bourse had no immediate comment on the People’s Daily’s article. HKEX shares were down 2.2% on Monday. LSE shares fell 2.1% in early trading in London.

Charles Li, the chief executive of the Hong Kong Exchanges & Clearing Ltd., appears undeterred by the LSE’s rejection and is preparing to make his case for the takeover directly to LSE investors. Beyond the political, regulatory and commercial hurdles HKEX faces, the Hong Kong bourse is also demanding LSE walk away from its own $27 billion deal for data provider Refinitiv.

With the purchase of Refinitiv, the former Thomson Reuters financial and risk business, LSE is seeking to transform itself into a global force in data and trading platforms. The deal is central to its strategy and has proved popular with investors, sending LSE shares surging even before HKEX came knocking.

Ron Arculli, a former HKEX chairman, said he thought LSE’s rejection letter offered HKEX a glimmer of hope. By saying that the initial bid undervalued the U.K. company, the London exchange may have left “a little crack in the door that may still be open,” Arculli said in a Bloomberg Television interview Monday.

The Hong Kong stock exchange is planning to undermine LSE’s case for buying Refinitiv and characterized the company as a low-growth utility weighed down with debt.

The dealmaking for LSE involves some of the world’s highest-profile financiers. Stephen Schwarzman’s Blackstone Group is on one side, as lead investor in Refinitiv; on the other, Ken Moelis’s firm is advising HKEX. The winning side will have to persuade the $320 billion Qatar Investment Authority, the sovereign wealth fund and the LSE’s biggest shareholder, which has so far declined to comment on the HKEX proposal.

Here is a rundown of the LSE’s criticisms of the offer:

There’s not enough cash in the bid, which is too low anyway.

“Three-quarters of your proposed consideration is in HKEX shares, representing a fundamentally different and much less attractive investment proposition to our shareholders.“Even assuming your proposal were deliverable, its value falls substantially short of an appropriate valuation.”

Hong Kong’s unrest makes that stock even less attractive.

“We see the value of your share consideration as inherently uncertain. The ongoing situation in Hong Kong adds to this uncertainty. Furthermore, we question the sustainability of HKEX’s position as a strategic gateway in the longer term.”

Then there’s HKEX’s unusual relationship with its government.

“There is no doubt that your unusual board structure and your relationship with the Hong Kong government will complicate matters,” the LSE said.

The Chinese territory’s government holds 6% of HKEX’s stock and appoints 6 of the 13 board members. The city’s chief executive -- a person appointed by Beijing -- picks HKEX’s chairman.

That relationship will concern U.S. and other authorities.

“Your proposal would be subject to full scrutiny from a number of financial regulators, as well as governmental entities under, for example, the U.K. Enterprise Act, the CFIUS [national security] process in the U.S., and the ‘golden powers’ regime in Italy,” the LSE said. “Your assertion that implementation of a transaction would be ‘swift and certain’ is simply not credible.”

LSE already has a bridgehead in China: Shanghai.

This “is our preferred and direct channel to access the many opportunities with China,” the LSE said.

They worked long and hard to get it: the Shanghai exchange interlisting project dates to 2015, when former finance minister George Osborne traveled to China to court officials. After a long wait while LSE sought Chinese approvals, Huatai Securities Co. became the first Stock Connect listing in London in June.

LSE also slammed HKEX’s own business as old school.

“The high geographic concentration and heavy exposure to market transaction volumes in your business would represent a significant backward step for LSEG strategically.”

Robert ended the letter with a final dig. “Given the fundamental flaws in your proposal, we see no merit in further engagement.”

(Updates with HKEX share decline in sixth paragraph.)

--With assistance from Kiuyan Wong and Silla Brush.

To contact the reporters on this story: Andrew Davis in London at abdavis@bloomberg.net;Alfred Liu in Hong Kong at aliu226@bloomberg.net

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Marion Dakers, James Hertling

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